US wireless network operators are scheduled to report their first quarter earnings starting this week, and collectively they're expected to report continued growth in the number of customers they're signing up.
Specifically, the analysts at Wall Street research firm Cowen predict the number of wireless phone customers will grow by 2.4%, as it has in the past few quarters.
So that leads to the obvious question: Where are all these new wireless phone customers coming from?
It's a legitimate question to ask, considering the analysts at Wall Street research firm Wells Fargo Securities expect AT&T, T-Mobile and Sprint to all report thousands of new postpaid phone customers in the first quarter. The firm said AT&T will add 75,000 net new postpaid customers, T-Mobile to gain 597,000 net postpaid customers, and Sprint will garner 20,000 net postpaid customers in Q1. Verizon, meanwhile, will lose 15,000 net postpaid customers, the firm predicted.
"In general, we expect Q1 to be a relatively low volume quarter, with promotional activity more focused on device promotions," the Wells Fargo analysts wrote in a recent note to investors.
Some Wall Street analysts have attributed part of this growth to the "migration" of prepaid customers into the postpaid bucket. "The growth is a tale of two markets: postpaid phones were up 2.5% Y/Y and is a recent record high, meanwhile prepaid was up just 2.0% Y/Y and is a recent record low," the Cowen analysts wrote in a recent note to investors. "Prepaid growth is well off ~5% growth in 2016-2017 and its lowest growth since 1Q15 as the prepaid base lost net subs Q/Q for the first time since 2Q14."
But the analysts at Wall Street research firm MoffettNathanson wrote in a recent note that the wireless industry's growth can't be explained by that one trend. In fact, they noted that the industry's growth rate appears to be outstripping population growth rates and the growing number of teenagers getting phones, and isn't attributable to other factors like the growing number of secondary phone-type devices like the Apple Watch.
"The most likely answer appears to be the simplest," wrote the MoffettNathanson analysts. "Carriers are offering free or partially subsidized phones in return for adding additional lines."
They continued: "It is all but certain that some customers have taken advantage of these offers even if it means adding a line they don’t need, and won’t use. The customer would simply reassign the new BOGO handset to an existing (used) line, moving an old unwanted handset to the new (unused) line… and then leaving that handset in a drawer, turned off and forgotten. Indeed, this very strategy was recommended to your author by a retail store representative on a recent visit. For the customer, all that is required for this to be a sensible approach is that the monthly service fee for the additional line would be less than what would otherwise be the monthly equipment payment for a new unsubsidized handset."
Incredibly, Sprint for its part appears to have recently fessed up to employing this exact strategy.
"Sprint’s postpaid net additions recently have been driven by 'free lines' offered to Sprint customers and the inclusion of less valuable tablet and other non-phone devices, as well as pre to post migrations that do not represent 'new' Sprint customers," the operator wrote in a recent FCC filing. The filing outlined Sprint's deteriorating financial and strategic situation as part of its efforts to get regulators to approve its proposed merger with T-Mobile.
The Wall Street Journal pointed to noted that Sprint isn't alone. Citing data from Wall Street firm New Street Research, the publication reported that these kinds of unneeded wireless contracts added 1.7 million “fake” lines to operators' customer bases in 2018.
Not surprisingly, the analysts at MoffettNathanson argued that the situation will eventually come back to bite carriers down the road. "Eventually, once these BOGO contracts have been satisfied, customers will begin to cancel those unnecessary-and-unused lines (lest they keep being charged for them in perpetuity)."
And that, the firm said, could spark operators to undertake desperate measures. "Would they feel compelled to become even more promotional, potentially dragging the industry back to the price and promotion wars that began in 2014 and carried all the way into 2017?" asked the MoffettNathanson analysts.
But wait! 5G is coming. Will that save the industry?
Not in the short term, according to the Cowen analysts. "While carrier messaging has shifted towards 5G, we don’t expect it to drive an acceleration in growth in the near term (despite Verizon electing to charge an extra $10/month for 5G), but could begin to drive modest improvement in 2021-2022 driven not by higher phone ARPU or sub growth, but instead by FWBB, Enterprise/Industrial IoT, and Consumer IoT."